A. Financial ratios are used to evaluate a company’s financial performance and health by comparing different financial metrics. There are many different financial ratios that can be used, but some of the most common ratios include:
Liquidity Ratios:
1. Current Ratio: Current Assets/Current Liabilities
2. Quick Ratio or Acid Test Ratio: (Current Assets – Inventory)/Current Liabilities
Solvency Ratios:
1. Debt to Equity Ratio: Total Liabilities/Shareholders’ Equity
2. Debt to Asset Ratio: Total Liabilities/Total Assets
Profitability Ratios:
1. Gross Profit Margin: Gross Profit/Net Sales
2. Operating Profit Margin: Operating Profit/Net Sales
3. Net Profit Margin: Net Income/Net Sales
4. Return on Equity (ROE): Net Income/Shareholders’ Equity
5. Return on Assets (ROA): Net Income/Total Assets
Efficiency Ratios:
1. Days Sales Outstanding (DSO): (Accounts Receivable/Annual Credit Sales) x 365 days
2. Inventory Turnover: Cost of goods sold/Inventory
3. Asset Turnover: Net Sales/Total Assets
Market Valuation Ratios:
1. Price-to-Earnings (P/E) Ratio: Market Price per Share/Earnings per Share (EPS)
2. Price-to-Book (P/B) Ratio: Market Price per Share/Book Value per Share
